Ted Cruz's VAT Taxes Wages, Health Insurance, Housing, Charities And Lots More

[David_N]

This is the republican's last hope. I find this hilarious.
Forbes Welcome

In recent days, defenders of Ted Cruz’s VAT have tried to argue that what’s taxable in a VAT is very similar to what’s taxable in a normal corporate income tax. Steve Moore of the The Heritage Foundation says that “almost all flat tax plans have this type of business net income tax,” and veteran tax warrior Ernie Christian opines that “tax reformers should focus on creating the best tax code for America — instead of creating confusion by wrongly tossing around the ‘VAT’ word as a j’accuse epithet.”

There’s only one problem with this grand papering-over: A VAT taxes very different things than a corporate income tax does, and very different things than other consumption-based tax reform plans do.

Put simply, a subtraction-method VAT (the kind Cruz is running on) only allows business purchases as deductions against business income. That means all sorts of expenses deductible under a corporate tax (wages, health insurance benefits, etc.) are not deductible in Cruz’s VAT.

Furthermore, there are many transactions that might find themselves liable for a VAT liability that are not liable for a corporate tax liability today.

This is an area I have covered before, and it bears repeating here. Wages paid are not deductible from a subtraction method VAT’s taxable income. Wages are deductible from the tax base of a corporate income tax. So there’s a VAT-level tax on wages paid that isn’t there under a corporate income tax.

When you combine a VAT with a personal tax on wages (as Cruz’s plan does), you have a cascaded, double tax on wages. It happens to be an integrated wage tax rate of 24.4% under the Cruz proposal.

Similar to wages, amounts businesses pay for employee fringe benefits like health insurance are not normally deductible from a VAT’s tax base. That means that the Cruz VAT introduces a new tax on employer-provided health insurance that does not exist today. Presumably, health insurance at work would still be excluded from Cruz’s personal flat tax, so there’s no double taxation problem like with wages. But it still takes a fully tax free form of compensation today and imposes a new 16% tax on it.

There’s not a lot of detail about how the Cruz VAT would deal with housing sales. Under a purely theoretical VAT, tax is owed anytime a piece of real estate (including residential real estate) is sold for a profit. In practice, VATs have carved out politically sensitive things like residential home sales and vacation homes, but have left in place less sensitive sources of profit like commercial real estate transactions. There’s also the question of new housing vs. housing which has been sold before.

Could the Cruz VAT tax you when you sell your house? Maybe not, but I doubt the designers accounted for that revenue loss when they calculated only a 16% rate.

Another basic feature of a VAT is that non-profits face VAT liabilities from at least two sources: First, there’s a VAT due on wages and benefits paid, so there will be a 16% VAT layer of tax on every minister or priest, church secretary and college janitor. In fairness to Cruz, he simultaneously repeals today’s payroll tax (FICA) which is also paid by these entities, but his VAT is bigger than today’s FICA.

The second potential VAT exposure comes as a result of small income-generating activities engaged in by charities and churches. For example, suppose your local parish has a hall they rent out for receptions. Will they have to start paying VAT on that? There’s already something today called an “unrelated business income tax,” or UBIT. Will that exist under a VAT, or something like it?

 

[Beaudreaux]

A VAT tax is not the Republican's last hope. Nor do we all believe in or support a VAT tax. For that matter, there nothing that WE ALL support or oppose. And, just for the record, Cruz himself is not supported by a majority of Republicans either. If you would like to discuss any particular part of the OP, other than what I have stated so far, please let me know exactly what you find "hilarious" and we can start there.

 

[akrunner88]

The VAT is an assault on the poor and working/middle class and a break for the rich. It's a regressive tax system that if he were to implement along with his other tax changes would leave the US severely underfunded.

Ted Cruz is a dangerous man and will never get into office so I'm not worried.